SAN DIEGO–Considering the launch of a CUSO, whether it’s just your credit union or a small group of credit unions?
One expert here shared some strategies for getting CUSOs off the ground based on the lessons she’s learned in helping CUs to do just that.
Sara Brooks, a consultant with Humintex, a management consulting firm that it says is 100% focused on credit unions, provided to NACUSO’S annual meeting here a checklist of points credit unions must keep in mind when looking to launch a CUSO. Among other projects, Brooks said she has spent the past two years working with Arizona’s Desert Financial Credit Union in starting two CUSOs, including an IT services CUSO for Corelation clients called SwitchThink Solutions, and mortgage CUSO called Define Mortgage Services.
“First off, you must define the problem you are trying to solve, and then what you are looking to, such as investment services or commercial services. Or are you looking to gain scale and leverage?” asked Brooks.
The first step, said Brooks, is the conceptual plan, which includes this checklist:
- Define your value proposition
- Identify players
- Identity the stakeholders
- Establish decision rights and criteria for a go/no-go
- Determine preferred economic model
- Identify potential ownership structures (and “your voting and decision rights. If you are the dominant player, how will you ensure you are inclusive while ensuring your values come to play?”)
- Establish a planning budget
What About Board?
One audience member asked Brooks about just how deep into the weeds a credit union’s board should get during this process.
“They can get pretty deep in,” responded Brooks. “But in my experience, the larger the credit union, the less deep in. Often, from the board’s perspective, it has to do with the ownership and legal issues, and they leave the operational issues to management. The truth is, once you form the CUSO, the credit union’s board doesn’t have as much oversight as they would if you were still doing that function inside the organization. They have questions because they are giving up control.”
The issues in deciding on structure have to do with control, expense structure, investment capital, and revenue potential. “This is where we try to suss out where the priorities lie,” said Brooks. “There are lots of different ways to structure it, and this is a way to give some direction to the lawyers.
Through the discussion around structure and the conceptual plan, that’s when it becomes time to dig in with the business plan, said Brooks. At this point, steps to take include:
- Market assessment
- Business proposition
- Structural design and demisement. “This is the one most institutions underestimate Demisement means carving up your own entity to move the things from your own operation into the CUSO that are needed to run it. When you do that you have to think about the whole member data thing, and how that data is shared. One of the things I have found is we tend to underestimate the amount of work involved in that. You’d be surprised at how many CUSOs I have worked with that didn’t think about this ahead of time. The other piece of this is your vendor contracts. When it becomes a multi-institution scenario you will find many vendors are looking for additional licensing fees”
- Implementation plan and start-up costs
- Risk Assessment and mitigation
- Rollout plan and communications
- 3-5 year operating plan
- Launch plan
- Sales plan
“This is what you generally take back to your board,” explained Brooks. “And one of the things your board is going to want to know is your start-up costs.”
Among the typical start-up costs that must be factored, said Brooks, include:
- Legal fees, including regulatory and compliance reviews, formation of documents, shared service agreements, and client agreements
- HR transition expenses (how to handle benefits, bonuses, etc. must be discussed)
- Branding and marketing
“My advice for any startup is get it as small as you possibly can to accomplish the initial goal,” said Brooks.
When it comes to board approvals, Brooks reminded it may require multiple board approvals, and that may take time. There is a need at this point to ensure the right business development expertise is on hand, that legal issues are addressed, that financials have been thoroughly reviewed and that all risk-management issues and mitigation have been through, she said.
“Now the real work begins,” said Brooks of the efforts that begin once the planning has been finished. Among the points to consider are:
- Brand framework and creative design
- Operating Agreement (ownership types and units, members and board seats)
- Articles of formation
- Attorney opinion letter
- Federal or state registration
- Accounting and HR system setup
- Support services agreement (owner CU services to the CUSO)
- Servicing agreements
- Intellectual property and asset licensing transfer (this is the credit union granting a license to the CUSO to use certain intellectual property)
- Assignment of key supplier agreements
- Trademark registrations
Once the basic formation pieces are in place, it’s time for implementation, said Brooks. The steps to consider in implementation include:
- Execute against the implementation project plan (“refine as you go”)
- Institute board meeting cadence
- Adopt operating policies and procedures (purchasing, HR, conflict of interest, code of conduct, investment policy)
- Establish monthly reporting cadence. “This is just about what do you need to run a CUSO, but what do your owners need from you”
- Launch to both employees and market with equal care and intent. “One thing I’ve seen is multiple town halls along the way, including when you’re just thinking about it, so when you get to launch it’s not a big scary surprise”
- Transition staff